Making Changes

Richard Battles created a lifetime of memories during his 20-year Naval career. He lived in Japan for nearly three years while assigned aboard the USS Midway aircraft carrier. Over the years his travels took him to such far-off places as Hong Kong, South Korea, and Thailand. But Battles retired from his military career in 2002. “I miss the friends I made over the years, and traveling overseas,” says Battles.

Along with the friendships and sense of adventure, Battles, now 45, misses the military’s financial perks–like the tax-free cost of living allowance. While in the Navy, Battles, who is single, received an annual base salary of $29,000, plus $16,000 in tax-free cost of living allowances.

Battles had a rude awakening when he retired and began working in the private sector. “I was making the same amount of money,” he says, “but I was being taxed more.” He bought a three-bedroom, two-bath home in Virginia Beach, Virginia, in 1996 for $86,700. Retiring from the military was a turning point for Battles. The change in his finances prompted him to take out a home equity line of credit so he could pay off his four credit cards, which had a total balance of $11,000.

“I wasn’t bringing home as much as I was used to,” says Battles, who now earns $56,200 as a senior investigator, conducting background investigations for a government contractor. Battles’ primary complaint is taxes. “I’m single, with no children, so I get hit hard.” For the last couple of years he has paid $2,000 after filing his federal and state taxes. “I’m being taxed on my take-home pay and my retirement check. When I was in the military, I owed maybe $20 or $30.”

Battles refinanced his home earlier this year, going from a 6% fixed interest to a 5/1 adjustable rate mortgage at 5.125%. When he refinanced, he separated the payments for homeowners insurance and property taxes, so that he pays them directly himself, rather than paying via an escrow account set up by the mortgage servicer. Battles says he got rid of the escrow so the money could sit in his account, earning interest.

Battles is looking for a way for Uncle Sam to take less of a bite. He is making $480 in extra payments monthly on his mortgage and hopes to pay off the 30-year loan in the next three to five years.

Helping him reach this goal faster is the fact that he recently took in a roommate, a friend whose rent pays half of his $430 monthly mortgage. Battles has no auto insurance or auto loan because he drives a company car.

The Advice
Kathy Williams, a certified financial planner with Williams Financial Services Group in Oklahoma City, assessed Battles’ situation.

Create a protection plan. Assuming his continued saving strategies and growth of his assets, if something were to happen to him he could be wiped out financially. It would be wise to see if his job offers discounted long-term care insurance,” says Williams. At 45, Battles can buy a policy at a cheaper price than he’ll be able to in his 60s. She suggests that Battles use the $2,000 contest winnings to pay the annual premium for a long-term care or disability insurance policy.

Battles should also get term life insurance. As a nonsmoker he might qualify for coverage as low as $10 to $20 a month. In addition, he needs disability insurance to replace lost income in the event that he is unable to work. And he needs to increase the liability limits on his homeowners insurance, specifically because he has a roommate.

Build retirement funds.  Battles should continue to invest 8% of his gross income so that he can get the match from his employer in his

401(k). Assuming an 8% projection and continued investing of at least 8% to 10% with employer matching, he could have an additional $500,000 or more in his 401(k) by age 62, particularly if he increases his contribution by 1% every year. His IRA would add another $165,000 or more assuming an 8% projection to his retirement savings.

Tackle taxes. Battles’ income range, $50,000 to $70,000, can be a tough tax zone when there aren’t a lot of deductions. He could consider increasing his 401(k) contribution to 10% to reduce his overall taxes and lessen the amount he’s putting into his brokerage account. He recently changed his Federal W-4 withholding status to single and zero, which Williams said should help alleviate some of the tax burden as well. Williams also advises Battles to be careful about selling stocks since he could incur a capital gains tax.

Learn from refinancing mistake. Battles’ 5-year ARM will reset in February 2014, at which point his interest rate will be adjusted higher each year. Battles says he wanted to refinance to get rid of escrow, which he couldn’t do with his previous lender. He was determined to be in charge of paying his own property taxes and insurance.

Williams says Battles should try to

refinance his home to a fixed mortgage as soon as possible. “Refinancing to get rid of escrow is not a good reason to refinance. Refinancing is usually best if you can shave two percentage points off your interest rate, otherwise you’re really not coming out ahead, and he only went from a fixed 6% rate to an adjustable 5.175% rate. In five years the ARM rates could be sky high. He has a goal to pay off the mortgage in three to five years but if he can’t pay his mortgage off in five years, he’s going to be vulnerable. And if he does, he will lose the tax benefits from the mortgage, further adding to his tax bill.”

Be a strategic saver. Williams says it’s not wise to keep more than $30,000 in a checking account. You want your emergency fund to be accessible should you need it, but you don’t want a mountain of cash lying around. Williams recommends leaving one month’s worth of expenses in a checking account. For emergencies, Williams suggests placing six months of expenses in a money market account. He should also have another account for short-term goals.

This article originally appeared in the November 2009 issue of Black Enterprise magazine.